Reuters quoted three trade sources said China iron ore trading association has banned its members from importing ore with less than 60% iron content.
The sources said the ban by the China Chamber of Commerce of Metals, Minerals and Chemicals Importers and Exporters covers trading firms but not steel mills and their licensed agents.
One Shandong based trader said it was part of a joint effort with the China Iron & Steel Association to rectify the sector.
A Hong Kong based trader attending a steel conference in Qingdao said "This is absolutely crazy. I can understand why they want to regulate the market and improve the quality but this will do nothing but drive up the prices of higher grade ores."
One owner of a privately held group of iron ore mines based in Hong Kong said deliveries of Indion ore with 55% Fe content were already being blocked recently.
Mr Glenn Kalvampara secretary of Goa Mineral Ore Exporters' Association, speaking from the western Indian state of Goa that mostly exports low grade ores to China "This is a surprise. We don't know what the rationale behind this is because most of the steel mills in China do need low grade ores."
He said that "Earlier there was some news on China wanting to reduce the number of importers. But this is a total surprise."
With major suppliers offering imported ore with Fe content of 63% or more, imports have rapidly pushed out domestic supply, weighing on China's attempt to wring a favorable term price out of the top suppliers, Rio Tinto, BHP Billiton and Vale.
Ms Melinda Moore Credit Suisse analyst said those big suppliers will remain unaffected by the CCCMC rule changes. She said that "For all the immediate chatter, CS does not expect any impact on international prices or import volumes. International suppliers and traders will switch their sales from Chinese traders to steel mills directly. The rules impact WHO imports, not WHAT is imported."
She added that CISA and CCCMC had passed three self discipline measures in recent days. The other two were disqualifying importers who imported less than 1 million tonnes in 2009 and an agency system to match large and mid sized mill consumption requirements, with ore re sales prohibited.
CISA which last year failed in a voluble attempt to win a 40% price cut from the big three has urged importers to boycott them for two months to fight their monopoly behavior
CISA has previously blamed small traders for undermining its position in benchmark price talks with foreign miners last year. Iron ore trading deals have hit world headlines in the past month after four Rio employees admitted taking bribes from small steel mills hoping to get access to supplies at term contract prices.
CISA has vowed to substantially reduce the number of licensed importers and impose strict guidance prices for iron ore, but has not had the clout to implement its plans. Its repeated calls for unity and threats to squash traders who undermine its attempts to impose discipline have had little obvious success and have had analysts scratching their heads.
Credit Suisse Ms Moore said in a note to clients this week that CISA latest threats would be counterproductive, removing about 30 million tonnes per month of iron ore from the market, about 38% of China consumption.